Economists say Obama plan would create jobs, but ...

WASHINGTON_ Could it work? That's the question being asked about President Barack Obama's big new jobs plan.

Independent experts answered Friday with a qualified yes.

The American Jobs Act would create jobs and help keep a struggling economy moving forward, said a number of economists. But they cautioned that it wouldn't shift the nation's business gears into overdrive, and it offers only modest benefits, given the headwinds the economy faces from a moribund housing sector and growing financial turmoil in Europe.

As only a short-term stimulus plan, the American Jobs Act wouldn't address structural and external problems holding back the U.S. economy. And since the proposals' very design is transitory, it makes them difficult to compare against the broad economic plans being proposed by GOP presidential candidates Mitt Romney and Jon Huntsman, who hope to replace Obama.

Macroeconomic Advisers, a leading economic forecast group, projected that Obama's plan "would give a significant boost to (the gross domestic product) and employment over the near-term."

There's the rub. Obama's plan aims to deliver only a short-term fix to keep the economy moving forward and avoid falling back into recession.

Then there's the price tag, $447 billion. That would add to the sum that must be covered by a special congressional deficit-reduction committee aiming to cut $1.5 trillion from federal spending over a decade. Obama's plan counts on this committee to find almost $2 trillion in cuts.

"It is a political question. Is there a worthwhile political tradeoff? The economics of it are not worrisome," said Chris Varvares, president of St. Louis-based Macroeconomic Advisers. He favors raising the deficit short term as long as there is a clear path to bringing it down over time. "The current hysteria over the deficit is misplaced ... our current deficit is not the problem, it is our future deficits."

Varvares and colleagues think the Obama plan would raise GDP by 1.3 percentage points through 2012, resulting in 1.3 million more people employed. They think the plan would add another 0.2 percentage point to growth in 2013.

That's in the ballpark of estimates from economists at Bank of America Merrill Lynch, who in a research note Friday estimated the American Jobs Act could add between 1 and 1.5 percentage points to economic growth next year. They also noted that for every percentage point of growth, the jobless rate falls by three-tenths of a percentage point.

"If that holds, we would see the unemployment averaging 8.6 percent by the end of 2012, instead of 8.9 percent," said the economists.

Mark Zandi, the chief economist for forecaster Moody's Analytics, envisioned 1.9 million jobs created if the plan passes as proposed, something he considers unlikely. However, about 40 percent of the jobs_ 750,000_ would come from the payroll tax holiday provisions alone.

Zandi noted that benefits from the Obama plan wouldn't be lasting ones.

"The plan also results in weaker growth in 2013, as most of the tax cuts and spending increases are temporary and fade during the year," he said. "Presumably the economy will be strong enough to handle it by then, but that is far from certain."

That's important, because there's no guarantee that hiring and growth associated with the plan would be permanent. In fact, it's one reason for the negative public view on prior federal stimulus efforts, various programs such as "Cash for Clunkers" to stimulate auto purchases, and a first-time homebuyer tax credit. All these efforts provided a spark, but the spark proved temporary.

"Businesses repeatedly see that, so they respond to it in a temporary way," said Martin Regalia, chief economist for the U.S. Chamber of Commerce, which raps Obama for not seeking more-lasting job creation. "It does help temporarily maintain or boost demand because it puts more spendable money in people's pockets, and some of that will be spent. If all you want to do is boost the growth rates for next year, this will probably do that."

But that's not necessarily the best course, he said. The chamber wanted a focus on the energy sector, where relaxation of rules could put people to work immediately, and more support for international trade, including passage of pending free-trade agreements_ especially the long-delayed deal with South Korea.

"Trade agreements were kind of mentioned almost casually, but there was no plank. We think that's something that would be very, very important," Regalia said, noting that Obama wants to double exports yet yields opportunities to others. "To get in there first is important, and in fact we're ceding the playing field to competitors who have already established trade agreements with (South) Korea."

Another reason why support for Obama's plan is hedged among experts: There's little to fix the housing sector, a huge drag on the economy. Obama talked broadly about encouraging government-controlled mortgage lenders Fannie Mae and Freddie Mac to refinance home loans to lower interest rates, but he gave few details.

There are 800,000 lender-owned properties nationwide, and another 800,000 in some stage of the foreclosure process. A staggering 3.5 million mortgages are now delinquent — not yet in the foreclosure process, but they could wind up there. Moreover, an estimated 30 percent of homes with a mortgage are now worth less than the mortgage — a phenomenon described as being underwater.

That's why support for the American Jobs Act is qualified.

"These are useful changes, but the most important driving force for our current economy is that people will not increase their spending until their balance sheets are repaired and their houses are no longer underwater," said Dean Croushore, chairman of the economics department at the University of Richmond. "These are things the government is not able to fix, so we should expect slow economic growth for several years to come."